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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For
the quarterly period ended September 30, 2010.
 or
 o
    
    Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to .
 Commission File No. 0-24172
 Southeastern Bank Financial Corporation
  Georgia
    
    58-2005097(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 3530 Wheeler Road, Augusta, Georgia 30909
   (Issuers telephone number, including area code)
  (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(do not check if a smaller reporting company)
 o þ




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
 PagePart IItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2010 and
December 31, 2009
    
    
    3Consolidated Statements of Income for the Three and Nine
Months ended September 30, 2010 and 2009
    
    
    5Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2010 and 2009
    
    
    7Notes to Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    30Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    58Item 4. Controls and Procedures
    
    
    58Part IIOther InformationItem 1. Legal Proceedings
    
    
    59Item 1A. Risk Factors
    
    
    59Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    59Item 3. Defaults Upon Senior Securities
    
    
    59Item 4. [Removed and Reserved]
    
    
    59Item 5. Other Information
    
    
    59Item 6. Exhibits
    
    
    60Signature
    
    
    61Exhibit 31.1Exhibit 31.2Exhibit 32.1
  *
    
    No information submitted under this caption  1




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2




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
 
 September 30,2010
    
    
    December 31,(Unaudited)
    
    

2009AssetsCash and due from banks
    
    $
    80,322
    
    
    $
    123,661Federal funds sold
    
    
    
    
    
    
    7,300Interest-bearing deposits in other banks
    
    
    37,586
    
    
    
    17,033Cash and cash equivalents
    
    
    117,908
    
    
    
    147,994Investment securitiesAvailable-for-sale
    
    
    541,549
    
    
    
    306,216Held-to-maturity, at cost (fair values of
$312 and $492, respectively)
    
    
    310
    
    
    
    490Loans held for sale
    
    
    31,804
    
    
    
    19,157Loans
    
    
    888,596
    
    
    
    937,489Less allowance for loan losses
    
    
    25,540
    
    
    
    22,338Loans, net
    
    
    863,056
    
    
    
    915,151Premises and equipment, net
    
    
    29,971
    
    
    
    31,702Accrued interest receivable
    
    
    6,226
    
    
    
    6,091Bank-owned life insurance
    
    
    23,957
    
    
    
    23,248Restricted equity securities
    
    
    5,912
    
    
    
    6,338Other real estate owned
    
    
    7,106
    
    
    
    7,974Prepaid FDIC assessment
    
    
    5,377
    
    
    
    6,886Deferred tax asset
    
    
    9,685
    
    
    
    11,160Other assets
    
    
    3,864
    
    
    
    8,712$
    1,646,725
    
    
    $
    1,491,119
  3




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 September 30,2010
    
    
    December 31,(Unaudited)
    
    
    2009Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    120,700
    
    
    $
    114,780Interest-bearing:NOW accounts
    
    
    368,994
    
    
    
    210,438Savings
    
    
    408,551
    
    
    
    343,740Money management accounts
    
    
    36,783
    
    
    
    44,781Time deposits over $100
    
    
    357,564
    
    
    
    418,751Other time deposits
    
    
    142,761
    
    
    
    148,0441,435,353
    
    
    
    1,280,534Securities sold under repurchase agreements
    
    
    438
    
    
    
    3,188Advances from Federal Home Loan Bank
    
    
    67,000
    
    
    
    77,000Other borrowed funds
    
    
    700
    
    
    
    600Accrued interest payable and other liabilities
    
    
    16,034
    
    
    
    13,106Subordinated debentures
    
    
    22,947
    
    
    
    22,947Total liabilities
    
    
    1,542,472
    
    
    
    1,397,375Stockholders equity:Preferred stock, no par value; 10,000,000 shares
authorized; 0 shares outstanding in 2010 and
2009, respectively
    
    
    
    
    
    
    Common stock, $3.00 par value; 10,000,000 shares
authorized; 6,674,465 and 6,672,826 shares issued
and outstanding in 2010 and 2009, respectively
    
    
    20,023
    
    
    
    20,018Additional paid-in capital
    
    
    62,553
    
    
    
    62,360Retained earnings
    
    
    17,403
    
    
    
    12,692Accumulated other comprehensive income (loss), net
    
    
    4,274
    
    
    
    (1,326
    )Total stockholders equity
    
    
    104,253
    
    
    
    93,744$
    1,646,725
    
    
    $
    1,491,119
   4




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Interest income:Loans, including fees
    
    $
    13,611
    
    
    $
    14,218
    
    
    $
    40,471
    
    
    $
    42,228Investment securities
    
    
    4,169
    
    
    
    3,294
    
    
    
    11,543
    
    
    
    10,964Federal funds sold
    
    
    2
    
    
    
    4
    
    
    
    9
    
    
    
    25Interest-bearing deposits in other banks
    
    
    112
    
    
    
    86
    
    
    
    294
    
    
    
    127Total interest income
    
    
    17,894
    
    
    
    17,602
    
    
    
    52,317
    
    
    
    53,344Interest expense:Deposits
    
    
    5,187
    
    
    
    5,658
    
    
    
    15,873
    
    
    
    18,469Federal funds purchased and securities sold
under repurchase agreements
    
    
    2
    
    
    
    114
    
    
    
    18
    
    
    
    320Other borrowings
    
    
    912
    
    
    
    1,009
    
    
    
    2,757
    
    
    
    2,928Total interest expense
    
    
    6,101
    
    
    
    6,781
    
    
    
    18,648
    
    
    
    21,717Net interest income
    
    
    11,793
    
    
    
    10,821
    
    
    
    33,669
    
    
    
    31,627Provision for loan losses
    
    
    4,759
    
    
    
    4,879
    
    
    
    11,841
    
    
    
    14,741Net interest income after provision
for loan losses
    
    
    7,034
    
    
    
    5,942
    
    
    
    21,828
    
    
    
    16,886Noninterest income:Service charges and fees on deposits
    
    
    1,802
    
    
    
    1,846
    
    
    
    5,145
    
    
    
    5,224Gain on sales of loans
    
    
    2,877
    
    
    
    1,945
    
    
    
    6,453
    
    
    
    6,643Gain (loss) on sale of fixed assets
    
    
    (1
    )
    
    
    
    
    
    
    26
    
    
    
    (16
    )Investment securities gains (losses), net
    
    
    775
    
    
    
    381
    
    
    
    937
    
    
    
    1,693Other-than-temporary lossTotal impairment loss
    
    
    (96
    )
    
    
    (619
    )
    
    
    (96
    )
    
    
    (1,810
    )Loss recognized in other comprehensive income
    
    
    
    
    
    
    263
    
    
    
    
    
    
    
    835Net impairment loss recognized in earnings
    
    
    (96
    )
    
    
    (356
    )
    
    
    (96
    )
    
    
    (975
    )Retail investment income
    
    
    497
    
    
    
    326
    
    
    
    1,248
    
    
    
    854Trust service fees
    
    
    276
    
    
    
    268
    
    
    
    853
    
    
    
    766Increase in cash surrender value of
bank-owned life insurance
    
    
    257
    
    
    
    256
    
    
    
    709
    
    
    
    649Miscellaneous income
    
    
    149
    
    
    
    142
    
    
    
    466
    
    
    
    428Total noninterest income
    
    
    6,536
    
    
    
    4,808
    
    
    
    15,741
    
    
    
    15,266Noninterest expense:Salaries and other personnel expense
    
    
    6,115
    
    
    
    5,469
    
    
    
    17,524
    
    
    
    16,927Occupancy expenses
    
    
    1,132
    
    
    
    1,213
    
    
    
    3,469
    
    
    
    3,495Other real estate losses
    
    
    708
    
    
    
    225
    
    
    
    1,036
    
    
    
    516Other operating expenses
    
    
    3,028
    
    
    
    3,357
    
    
    
    8,948
    
    
    
    9,968Total noninterest expense
    
    
    10,983
    
    
    
    10,264
    
    
    
    30,977
    
    
    
    30,906Income before income taxes
    
    
    2,587
    
    
    
    486
    
    
    
    6,592
    
    
    
    1,246Income tax expense (benefit)
    
    
    752
    
    
    
    (254
    )
    
    
    1,882
    
    
    
    (187
    )Net income
    
    $
    1,835
    
    
    $
    740
    
    
    $
    4,710
    
    
    $
    1,433
  5




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Basic net income per share
    
    $
    0.27
    
    
    $
    0.11
    
    
    $
    0.71
    
    
    $
    0.23Diluted net income per share
    
    $
    0.27
    
    
    $
    0.11
    
    
    $
    0.71
    
    
    $
    0.23Weighted average common shares outstanding
    
    
    6,674,465
    
    
    
    6,672,118
    
    
    
    6,673,912
    
    
    
    6,338,632Weighted average number of common and
common equivalent shares outstanding
    
    
    6,674,465
    
    
    
    6,672,388
    
    
    
    6,673,912
    
    
    
    6,344,275
   6




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
  Nine Months EndedSeptember 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    4,710
    
    
    $
    1,433Adjustments to reconcile net income to net cash
provided by operating activitiesDepreciation
    
    
    2,018
    
    
    
    2,027Deferred income tax benefit
    
    
    (1,982
    )
    
    
    Provision for loan losses
    
    
    11,841
    
    
    
    14,741Net investment securities (gains) losses
    
    
    (841
    )
    
    
    (718
    )Net amortization of premium on investment securities
    
    
    1,057
    
    
    
    146Increase in CSV of Bank-owned life insurance
    
    
    (709
    )
    
    
    (649
    )Stock options compensation cost
    
    
    181
    
    
    
    141(Gain) loss on disposal of premises and equipment
    
    
    (26
    )
    
    
    16Deferred gain on the sale of other real estate
    
    
    (17
    )
    
    
    (Gain) loss on the sale of other real estate
    
    
    (344
    )
    
    
    516Increase in other real estate valuation allowance
    
    
    1,380
    
    
    
    Gain on sales of loans
    
    
    (6,453
    )
    
    
    (6,643
    )Real estate loans originated for sale
    
    
    (244,807
    )
    
    
    (289,322
    )Proceeds from sales of real estate loans
    
    
    238,612
    
    
    
    294,086(Increase) decrease in accrued interest receivable
    
    
    (135
    )
    
    
    716Decrease (increase) in other assets
    
    
    6,357
    
    
    
    (800
    )Increase (decrease) in accrued interest payable and other liabilities
    
    
    2,928
    
    
    
    (120
    )Net cash provided by operating activities
    
    
    13,770
    
    
    
    15,570Cash flows from investing activities:Proceeds from sales of available-for-sale securities
    
    
    41,907
    
    
    
    79,533Proceeds from maturities and calls of available-for-sale securities
    
    
    139,190
    
    
    
    111,070Proceeds from maturities of held-to-maturity securities
    
    
    180
    
    
    
    203Purchase of available-for-sale securities
    
    
    (407,589
    )
    
    
    (201,968
    )Purchase of restricted equity securities
    
    
    
    
    
    
    (322
    )Proceeds from redemption of FHLB stock
    
    
    426
    
    
    
    23Net decrease (increase) in loans
    
    
    32,343
    
    
    
    (5,675
    )Purchase of Bank-owned life insurance
    
    
    
    
    
    
    (5,000
    )Additions to premises and equipment
    
    
    (290
    )
    
    
    (685
    )Proceeds from sale of other real estate
    
    
    7,760
    
    
    
    6,430Proceeds from sale of premises and equipment
    
    
    30
    
    
    
    270Net cash used in investing activities
    
    
    (186,043
    )
    
    
    (16,121
    )
  7




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
  Nine Months EndedSeptember 30,2010
    
    
    2009Cash flows from financing activities:Net increase in deposits
    
    
    154,819
    
    
    
    119,196Net decrease in securities sold under
repurchase agreements
    
    
    (2,750
    )
    
    
    (61,693
    )Payments of Federal Home Loan Bank advances
    
    
    (10,000
    )
    
    
    (7,000
    )Proceeds from subordinated debentures
    
    
    
    
    
    
    2,947Proceeds from other borrowed funds
    
    
    100
    
    
    
    600Purchase of treasury stock
    
    
    
    
    
    
    (5
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    9,010Payment of cash dividends
    
    
    
    
    
    
    (778
    )Proceeds from Directors stock purchase plan
    
    
    18
    
    
    
    24Net cash provided by financing activities
    
    
    142,187
    
    
    
    62,301Net (decrease) increase in cash and cash equivalents
    
    $
    (30,086
    )
    
    $
    61,750Cash and cash equivalents at beginning of period
    
    
    147,994
    
    
    
    37,768Cash and cash equivalents at end of period
    
    $
    117,908
    
    
    $
    99,518Supplemental disclosures of cash paid during the period for:Interest
    
    $
    18,780
    
    
    $
    23,043Income taxes
    
    $
    (1,213
    )
    
    $
    351Supplemental information on noncash investing activities:Loans transferred to other real estate
    
    $
    7,911
    
    
    $
    16,831
   8




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9




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Accounting for Various
Topics, Technical Corrections to SEC Paragraphs. Technical Corrections to Various Topics.
     10




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September 30, 2010Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair value(Dollars in thousands)Available-for-saleMortgage backed securitiesU.S. GSEs* MBS  residential
    
    $
    85,890
    
    
    
    2,400
    
    
    
    (353
    )
    
    
    87,937U.S. GSEs CMO
    
    
    166,433
    
    
    
    2,573
    
    
    
    (568
    )
    
    
    168,438Other CMO
    
    
    3,908
    
    
    
    37
    
    
    
    (87
    )
    
    
    3,858Total MBS
    
    $
    256,231
    
    
    
    5,010
    
    
    
    (1,008
    )
    
    
    260,233Obligations of U.S. Government agencies
    
    $
    197,126
    
    
    
    1,376
    
    
    
    (39
    )
    
    
    198,463Obligations of states and
political subdivisions
    
    
    48,608
    
    
    
    1,284
    
    
    
    (31
    )
    
    
    49,861Corporate bonds
    
    
    32,695
    
    
    
    568
    
    
    
    (273
    )
    
    
    32,990Equity securities
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2$
    534,662
    
    
    
    8,238
    
    
    
    (1,351
    )
    
    
    541,549Held-to-maturityObligations of states and
political subdivisions
    
    $
    310
    
    
    
    2
    
    
    
    
    
    
    
    312$
    310
    
    
    
    2
    
    
    
    
    
    
    
    312
 *
    
    Government sponsored entities  11




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##### Table of Contents



December 31, 2009Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair value(Dollars in thousands)Available-for-saleMortgage backed securitiesU.S. GSEs MBS  residential
    
    $
    87,113
    
    
    
    2,245
    
    
    
    (205
    )
    
    
    89,153U.S. GSEs CMO
    
    
    107,153
    
    
    
    1,116
    
    
    
    (1,427
    )
    
    
    106,842Other CMO
    
    
    7,834
    
    
    
    142
    
    
    
    (301
    )
    
    
    7,675Total MBS
    
    $
    202,100
    
    
    
    3,503
    
    
    
    (1,933
    )
    
    
    203,670Obligations
of U.S. Government agencies
    
    $
    67,290
    
    
    
    43
    
    
    
    (1,003
    )
    
    
    66,330Obligations of states and
political subdivisions
    
    
    26,402
    
    
    
    299
    
    
    
    (521
    )
    
    
    26,180Corporate bonds
    
    
    12,591
    
    
    
    35
    
    
    
    (2,594
    )
    
    
    10,032Equity securities
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4$
    308,387
    
    
    
    3,880
    
    
    
    (6,051
    )
    
    
    306,216Held-to-maturityObligations of states and
political subdivisions
    
    $
    490
    
    
    
    2
    
    
    
    
    
    
    
    492$
    490
    
    
    
    2
    
    
    
    
    
    
    
    492
  September 30, 2010Amortized
    
    
    Estimatedcost
    
    
    fair value(Dollars in thousands)Available-for-sale:One year or less
    
    $
    8
    
    
    
    8After one year through five years
    
    
    19,104
    
    
    
    19,261After five years through ten years
    
    
    102,114
    
    
    
    103,402After ten years
    
    
    413,434
    
    
    
    418,876$
    534,660
    
    
    
    541,547Held-to-maturity:After one year through five years
    
    $
    310
    
    
    
    312$
    310
    
    
    
    312
  12




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September 30, 2010Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealizedfair value
    
    
    loss
    
    
    fair value
    
    
    loss
    
    
    fair value
    
    
    loss(Dollars in thousands)Temporarily impairedMortgage backed securitiesU.S. GSEs MBS  residential
    
    $
    22,771
    
    
    
    156
    
    
    
    453
    
    
    
    197
    
    
    
    23,224
    
    
    
    353U.S. GSEs CMO
    
    
    55,409
    
    
    
    568
    
    
    
    
    
    
    
    
    
    
    
    55,409
    
    
    
    568Other CMO
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    87
    
    
    
    2,000
    
    
    
    87Total MBS
    
    $
    78,180
    
    
    
    724
    
    
    
    2,453
    
    
    
    284
    
    
    
    80,633
    
    
    
    1,008Obligations of U.S. Government agencies
    
    $
    13,396
    
    
    
    38
    
    
    
    2,612
    
    
    
    1
    
    
    
    16,008
    
    
    
    39Obligations of states and
political subdivisions
    
    
    2,125
    
    
    
    
    
    
    
    2,370
    
    
    
    31
    
    
    
    4,495
    
    
    
    31Corporate bonds
    
    
    5,521
    
    
    
    166
    
    
    
    2,867
    
    
    
    107
    
    
    
    8,388
    
    
    
    273$
    99,222
    
    
    
    928
    
    
    
    10,302
    
    
    
    423
    
    
    
    109,524
    
    
    
    1,351Other-than-temporarily impairedMortgage backed securitiesOther CMO
    
    $
    
    
    
    
    
    
    
    
    1,142
    
    
    
    
    
    
    
    1,142
    
    
    
    $
    99,222
    
    
    
    928
    
    
    
    11,444
    
    
    
    423
    
    
    
    110,666
    
    
    
    1,351
 December 31, 2009Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealizedfair value
    
    
    loss
    
    
    fair value
    
    
    loss
    
    
    fair value
    
    
    loss(Dollars in thousands)Temporarily impairedMortgage backed securitiesU.S. GSEs MBS  residential
    
    $
    21,996
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    21,996
    
    
    
    205U.S. GSEs CMO
    
    
    61,373
    
    
    
    1,408
    
    
    
    665
    
    
    
    19
    
    
    
    62,038
    
    
    
    1,427Other CMO
    
    
    
    
    
    
    
    
    
    
    4,243
    
    
    
    285
    
    
    
    4,243
    
    
    
    285Total MBS
    
    $
    83,369
    
    
    
    1,613
    
    
    
    4,908
    
    
    
    304
    
    
    
    88,277
    
    
    
    1,917Obligations of U.S. Government agencies
    
    $
    43,528
    
    
    
    1,003
    
    
    
    
    
    
    
    
    
    
    
    43,528
    
    
    
    1,003Obligations of states and
political subdivisions
    
    
    8,644
    
    
    
    220
    
    
    
    4,457
    
    
    
    301
    
    
    
    13,101
    
    
    
    521Corporate bonds
    
    
    733
    
    
    
    267
    
    
    
    6,291
    
    
    
    2,327
    
    
    
    7,024
    
    
    
    2,594$
    136,274
    
    
    
    3,103
    
    
    
    15,656
    
    
    
    2,932
    
    
    
    151,930
    
    
    
    6,035Other-than-temporarily impairedMortgage backed securitiesOther CMO
    
    $
    
    
    
    
    
    
    
    
    748
    
    
    
    16
    
    
    
    748
    
    
    
    16$
    136,274
    
    
    
    3,103
    
    
    
    16,404
    
    
    
    2,948
    
    
    
    152,678
    
    
    
    6,051
   13




---



##### Table of Contents



Other-Than-Temporary Impairment  September 30, 2010
 Investments  Debt and Equity Securities.
    14




---



##### Table of Contents



Mortgage-backed Securities
     Corporate Securities
   15




---



##### Table of Contents



Beginning balance, July 1, 2010
    
    $
    Amounts related to credit loss for which
an other-than-temporary impairment
was not previously recognized
    
    
    96Additions/SubtractionsAmounts realized for securities sold during the period
    
    
    Amounts related to securities for which the company
intends to sell or that it will be more likely than not
that the company will be required to sell prior to
recovery of amortized cost basis
    
    
    Reductions for increase in cash flows expected to be
collected that are recognized over the remaining
life of the security
    
    
    Increases to the amount related to the credit
loss for which other-than-temporary impairment was
previously recognized
    
    
    Ending balance, September 30, 2010
    
    $
    96
 Other-Than-Temporary
Impairment  September 30, 2009
   16




---



##### Table of Contents



Mortgage-backed Securities
      17




---



##### Table of Contents



Corporate Securities
     Beginning balance, July 1, 2009
    
    $
    619Amounts related to credit loss for which
an other-than-temporary impairment
was not previously recognized
    
    
    Additions/SubtractionsAmounts realized for securities sold during the period
    
    
    Amounts related to securities for which the company
intends to sell or that it will be more likely than not
that the company will be required to sell prior to
recovery of amortized cost basis
    
    
    Reductions for increase in cash flows expected to be
collected that are recognized over the remaining
life of the security
    
    
    Increases to the amount related to the credit
loss for which other-than-temporary impairment was
previously recognized
    
    
    356Ending balance, September 30, 2009
    
    $
    975
  18




---



##### Table of Contents



SilvertonFinancialServices, Inc
    
    
    CMO 1
    
    
    CMO 2
    
    
    Total(Dollars in thousands)Amount of other-than-temporary impairment
related to credit losses at July 1, 2009
    
    $
    500
    
    
    $
    57
    
    
    $
    62
    
    
    $
    619Addition for credit losses recognized in earnings
    
    
    
    
    
    
    98
    
    
    
    258
    
    
    
    356Amount of other-than-temporary impairment
related to credit losses at September 30, 2009
    
    $
    500
    
    
    $
    155
    
    
    $
    320
    
    
    $
    975
   EstimatedAmortized
    
    
    Fair
    
    
    Unrealized
    
    
    Ratings as of Sept. 30, 2009cost
    
    
    Value
    
    
    Losses
    
    
    S&P
    
    
    Fitch
    
    
    Moodys(Dollars in thousands)Silverton Financial Services, Inc.
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    NR
    
    NR
    
    NRCMO 1
    
    
    793
    
    
    
    702
    
    
    
    (91
    )
    
    CCC
    
    
    C
    
    
    NRCMO 2
    
    
    1,316
    
    
    
    1,144
    
    
    
    (172
    )
    
    CCC
    
    NR
    
    Caa2Total
    
    $
    2,109
    
    
    $
    1,846
    
    
    $
    (263
    )
  19




---



##### Table of Contents



September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Commercial, financial, and agricultural
    
    $
    97,123
    
    
    
    102,160Real estate:Commercial
    
    
    343,082
    
    
    
    322,864Residential
    
    
    244,215
    
    
    
    219,217Acquisition, development
and construction
    
    
    185,934
    
    
    
    270,062Consumer installment
    
    
    18,248
    
    
    
    23,241$
    888,602
    
    
    
    937,544Less allowance for loan losses
    
    
    25,540
    
    
    
    22,338Less deferred loan origination fees (costs)
    
    
    6
    
    
    
    55$
    863,056
    
    
    
    915,151
  September 30, 2010
    
    
    September 30, 2009(Dollars in thousands)Balance, beginning of year
    
    $
    22,338
    
    
    
    14,742Provision for loan losses
    
    
    11,841
    
    
    
    14,741Charge-offs
    
    
    (9,653
    )
    
    
    (13,313
    )Recoveries
    
    
    1,014
    
    
    
    656Balance, end of year
    
    $
    25,540
    
    
    
    16,826
  September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Period end loans with no allocated allowance
for loan losses
    
    $
    10,426
    
    
    $
    10,391Period end loans with allocated allowance
for loan losses
    
    
    11,173
    
    
    
    24,276$
    21,599
    
    
    $
    34,667Amount of the allowance for loan loss allocated
    
    $
    448
    
    
    $
    1,979
 September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Average of individually impaired loans during year
    
    $
    25,757
    
    
    $
    37,212Interest income recognized during impairment
    
    
    310
    
    
    
    784Cash-basis interest income recognized
    
    
    310
    
    
    
    784
  20




---



##### Table of Contents



September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Loans past due over 90 days still on accrual
    
    $
    
    
    
    $
    Nonaccrual loans
    
    
    24,533
    
    
    
    32,257
    Level 1:
    
    Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of
the measurement date.Level 2:
    
    Significant other observable inputs other than Level 1 prices,
such as quoted market prices for similar assets or liabilities,
quoted prices in markets that are not active, or other inputs
that are observable or can be corroborated by observable market
data.Level 3:
    
    Significant unobservable inputs that reflect a companys own
assumptions about the assumptions that market participants would
use in pricing an asset or liability.
  Investment Securities
  21




---



##### Table of Contents



Mortgage Banking Derivatives:
 Loans Held for Sale
 Impaired Loans
 Investments in Tax Credits:
 Other Real Estate Owned
  22




---



##### Table of Contents



Assets and Liabilities Measured on a Recurring Basis
  Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableSeptember 30,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Available-for-sale securitiesObligations of U.S.
Government agencies
    
    $
    198,463
    
    
    
    34,689
    
    
    
    163,774
    
    
    
    Obligations of states and
political subdivisions
    
    
    49,861
    
    
    
    18,421
    
    
    
    31,440
    
    
    
    Mortgage-backed securitiesU.S. GSEs MBS  residential
    
    
    87,937
    
    
    
    11,370
    
    
    
    76,114
    
    
    
    453U.S. GSEs CMO
    
    
    168,438
    
    
    
    6,541
    
    
    
    161,897
    
    
    
    Other CMO
    
    
    3,858
    
    
    
    
    
    
    
    933
    
    
    
    2,925Corporate bonds
    
    
    32,990
    
    
    
    12,536
    
    
    
    9,535
    
    
    
    10,919Equity securities
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    Total available-for-sale securities
    
    $
    541,549
    
    
    
    83,559
    
    
    
    443,693
    
    
    
    14,297Tax credits
    
    
    375
    
    
    
    
    
    
    
    
    
    
    
    375Loans held for sale
    
    
    31,804
    
    
    
    
    
    
    
    31,804
    
    
    
    Mortgage banking derivatives
    
    
    12
    
    
    
    
    
    
    
    12
    
    
    
    Total
    
    $
    573,740
    
    
    
    83,559
    
    
    
    475,509
    
    
    
    14,672
 Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Available-for-sale securitiesObligations of U.S.
Government agencies
    
    $
    66,330
    
    
    
    21,663
    
    
    
    44,667
    
    
    
    Obligations of states and
political subdivisions
    
    
    26,180
    
    
    
    
    
    
    
    26,180
    
    
    
    Mortgage-backed securitiesU.S. GSEs MBS  residential
    
    
    89,153
    
    
    
    
    
    
    
    88,601
    
    
    
    552U.S. GSEs CMO
    
    
    106,842
    
    
    
    10,510
    
    
    
    96,332
    
    
    
    Other CMO
    
    
    7,675
    
    
    
    
    
    
    
    3,894
    
    
    
    3,781Corporate bonds
    
    
    10,032
    
    
    
    
    
    
    
    
    
    
    
    10,032Equity securities
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    Total available-for-sale securities
    
    $
    306,216
    
    
    
    32,177
    
    
    
    259,674
    
    
    
    14,365Tax credits
    
    
    435
    
    
    
    
    
    
    
    
    
    
    
    435Loans held for sale
    
    
    19,157
    
    
    
    
    
    
    
    19,157
    
    
    
    Mortgage banking derivatives
    
    
    182
    
    
    
    
    
    
    
    182
    
    
    
    Total
    
    $
    325,990
    
    
    
    32,177
    
    
    
    279,013
    
    
    
    14,800
  23




---



##### Table of Contents



Fair Value Measurements Using Significant Unobservable Inputs(Level 3)Available-for-saleTax credits
    
    
    Securities
    
    
    Total(Dollars in thousands)Beginning balance, January 1, 2010
    
    $
    435
    
    
    
    14,365
    
    
    
    14,800Total gains or losses (realized/unrealized)Included in earningsGain (loss) on sales
    
    
    
    
    
    
    (122
    )
    
    
    (122
    )Other-than-temporary impairment
    
    
    
    
    
    
    (96
    )
    
    
    (96
    )Amortization of tax credit investment
    
    
    (60
    )
    
    
    
    
    
    
    (60
    )Included in other comprehensive income
    
    
    
    
    
    
    1,940
    
    
    
    1,940Purchases, sales, issuances and settlements, net
    
    
    
    
    
    
    (1,790
    )
    
    
    (1,790
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    
    
    
    
    Ending balance, September 30, 2010
    
    $
    375
    
    
    
    14,297
    
    
    
    14,672
 Fair Value Measurements Using Significant Unobservable Inputs(Level 3)Available-for-saleTax credits
    
    
    Securities
    
    
    Total(Dollars in thousands)Beginning balance, January 1, 2009
    
    $
    515
    
    
    
    4,130
    
    
    
    4,645Total gains or losses (realized/unrealized)Included in earningsOther-than-temporary impairment
    
    
    
    
    
    
    (356
    )
    
    
    (356
    )Amortization of tax credit investment
    
    
    (60
    )
    
    
    
    
    
    
    (60
    )Included in other comprehensive income
    
    
    
    
    
    
    1,598
    
    
    
    1,598Transfers in and/or out of Level 3
    
    
    
    
    
    
    9,133
    
    
    
    9,133Ending balance, September 30, 2009
    
    $
    455
    
    
    
    14,505
    
    
    
    14,960
  24




---



##### Table of Contents



Assets and Liabilities Measured on a Non-Recurring Basis
  Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableSeptember 30,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Assets:Impaired loans
    
    $
    10,860
    
    
    
    
    
    
    
    
    
    
    
    10,860Other real estate owned
    
    
    7,106
    
    
    
    
    
    
    
    
    
    
    
    7,106
 Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Assets:Impaired loans
    
    $
    22,581
    
    
    
    
    
    
    
    
    
    
    
    22,581Other real estate owned
    
    
    7,974
    
    
    
    
    
    
    
    
    
    
    
    7,974
        25




---



##### Table of Contents



(a)
    
    Cash and Cash Equivalents and Federal Funds Sold
  (b)
    
    Investment Securities
  (c)
    
    Loans
   26




---



##### Table of Contents



(d)
    
    Deposits
  (e)
    
    Securities Sold Under Repurchase Agreements
  (f)
    
    Other Borrowed Funds
  (g)
    
    Advances from Federal Home Loan Bank
  (h)
    
    Subordinated debentures
  (i)
    
    Commitments
   27




---



##### Table of Contents



September 30, 2010Carrying
    
    
    Estimatedamount
    
    
    fair value(Dollars in thousands)Financial assets:Cash and cash
equivalents
    
    $
    117,908
    
    
    
    117,908Investment securities
    
    
    541,859
    
    
    
    541,861Loans, net
    
    
    894,860
    
    
    
    890,873Financial liabilities:Deposits with stated maturities
    
    
    500,325
    
    
    
    503,992Deposits without stated maturities
    
    
    935,028
    
    
    
    935,028Securities sold under
repurchase agreements
    
    
    438
    
    
    
    438Other borrowed funds
    
    
    700
    
    
    
    700Advances from FHLB
    
    
    67,000
    
    
    
    73,572Subordinated debentures
    
    
    22,947
    
    
    
    14,931
 December 31, 2009Carrying
    
    
    Estimatedamount
    
    
    fair value(Dollars in thousands)Financial assets:Cash and cash
equivalents
    
    $
    147,994
    
    
    
    147,994Investment securities
    
    
    306,706
    
    
    
    306,708Loans, net
    
    
    934,308
    
    
    
    943,885Financial liabilities:Deposits with stated maturities
    
    
    566,795
    
    
    
    570,791Deposits without stated maturities
    
    
    713,739
    
    
    
    713,739Securities sold under
repurchase agreements
    
    
    3,188
    
    
    
    3,188Other borrowed funds
    
    
    600
    
    
    
    600Advances from FHLB
    
    
    77,000
    
    
    
    80,670Subordinated debentures
    
    
    22,947
    
    
    
    14,793
  28




---



##### Table of Contents



29




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
  Overview
      30




---



##### Table of Contents



31




---



##### Table of Contents



Table 1  Selected Financial Data
 September 30,
    
    
    December 31,
    
    
    September 30,2010
    
    
    2009
    
    
    2009(Dollars in thousands)Assets
    
    $
    1,646,725
    
    
    $
    1,491,119
    
    
    $
    1,475,805Loans
    
    
    888,596
    
    
    
    937,489
    
    
    
    963,016Deposits
    
    
    1,435,353
    
    
    
    1,280,534
    
    
    
    1,258,748Annualized return on average total assets
    
    
    0.41
    %
    
    
    (0.54
    %)
    
    
    0.13
    %Annualized return on average equity
    
    
    6.33
    %
    
    
    (7.92
    %)
    
    
    1.93
    %
      32




---



##### Table of Contents



Forward-Looking Statements
  Critical Accounting Estimates
  Allowance for Loan Losses
   33




---



##### Table of Contents



Fair Value of Financial Instruments
  Other Real Estate Owned
   34




---



##### Table of Contents



Investment Securities
  Results of Operations
 Three Months Ended 2010 compared to Three Months Ended 2009:
    35




---



##### Table of Contents



Nine Months Ended 2010 compared to Nine Months Ended 2009:
       36




---



##### Table of Contents



Table 2  Selected Balance Sheet Data
 September 30,
    
    
    December 31,
    
    
    Variance2010
    
    
    2009
    
    
    Amount
    
    
    %(Dollars in thousands)Cash, due from banks
and interest-bearing deposits
    
    $
    117,908
    
    
    $
    140,694
    
    
    $
    (22,786
    )
    
    
    (16.2
    %)Federal funds sold
    
    
    
    
    
    
    7,300
    
    
    
    (7,300
    )
    
    
    (100.0
    %)Investment securities
    
    
    541,859
    
    
    
    306,706
    
    
    
    235,153
    
    
    
    76.7
    %Loans
    
    
    888,596
    
    
    
    937,489
    
    
    
    (48,893
    )
    
    
    (5.2
    %)Other real estate owned
    
    
    7,106
    
    
    
    7,974
    
    
    
    (868
    )
    
    
    (10.9
    %)Assets
    
    
    1,646,725
    
    
    
    1,491,119
    
    
    
    155,606
    
    
    
    10.4
    %Deposits
    
    
    1,435,353
    
    
    
    1,280,534
    
    
    
    154,819
    
    
    
    12.1
    %Securities sold under repurchase agreements
    
    
    438
    
    
    
    3,188
    
    
    
    (2,750
    )
    
    
    (86.3
    %)Advances from Federal Home Loan Bank
    
    
    67,000
    
    
    
    77,000
    
    
    
    (10,000
    )
    
    
    (13.0
    %)Liabilities
    
    
    1,542,472
    
    
    
    1,397,375
    
    
    
    145,097
    
    
    
    10.4
    %Stockholders equity
    
    
    104,253
    
    
    
    93,744
    
    
    
    10,509
    
    
    
    11.2
    %
    37




---



##### Table of Contents



Net Interest Income
  Table 3  Average Balances, Income and Expenses, Yields and Rates
 Three Months Ended Sept. 30, 2010
    
    
    Three Months Ended Sept. 30, 2009Annualized
    
    
    
    
    
    
    
    
    
    
    AnnualizedAverage
    
    
    Amount
    
    
    
    
    
    
    Average
    
    
    AmountAverage
    
    
    Yield or
    
    
    Paid or
    
    
    Average
    
    
    Yield or
    
    
    Paid orAmount
    
    
    Rate
    
    
    Earned
    
    
    Amount
    
    
    Rate
    
    
    Earned(Dollars in thousands)Interest-earning assets:Loans
    
    $
    922,049
    
    
    
    5.80
    %
    
    $
    13,611
    
    
    $
    981,976
    
    
    
    5.69
    %
    
    $
    14,218Investment securitiesTaxable
    
    
    459,384
    
    
    
    3.41
    %
    
    
    3,915
    
    
    
    265,590
    
    
    
    4.60
    %
    
    
    3,052Tax-exempt
    
    
    24,072
    
    
    
    4.22
    %
    
    
    254
    
    
    
    22,123
    
    
    
    4.38
    %
    
    
    242Federal funds sold
    
    
    4,870
    
    
    
    0.16
    %
    
    
    2
    
    
    
    7,300
    
    
    
    0.21
    %
    
    
    4Interest-bearing deposits in other banks
    
    
    75,084
    
    
    
    0.59
    %
    
    
    112
    
    
    
    61,940
    
    
    
    0.55
    %
    
    
    86Total interest-earning assets
    
    $
    1,485,459
    
    
    
    4.75
    %
    
    $
    17,894
    
    
    $
    1,338,929
    
    
    
    5.18
    %
    
    $
    17,602Interest-bearing liabilities:Deposits
    
    $
    1,276,453
    
    
    
    1.61
    %
    
    $
    5,187
    
    
    $
    1,079,093
    
    
    
    2.08
    %
    
    $
    5,658Federal funds purchased / securities
sold under repurchase agreements
    
    
    520
    
    
    
    1.54
    %
    
    
    2
    
    
    
    57,907
    
    
    
    0.78
    %
    
    
    114Other borrowings
    
    
    95,673
    
    
    
    3.78
    %
    
    
    912
    
    
    
    101,764
    
    
    
    3.93
    %
    
    
    1,009Total interest-bearing liabilities
    
    $
    1,372,646
    
    
    
    1.76
    %
    
    $
    6,101
    
    
    $
    1,238,764
    
    
    
    2.17
    %
    
    $
    6,781Net interest margin/income:
    
    
    
    
    
    
    3.12
    %
    
    $
    11,793
    
    
    
    
    
    
    
    3.17
    %
    
    $
    10,821
  38




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Table 4  Average Balances, Income and Expenses, Yields and Rates
 Nine Months Ended Sept. 30, 2010
    
    
    Nine Months Ended Sept. 30, 2009Annualized
    
    
    
    
    
    
    
    
    
    
    AnnualizedAverage
    
    
    Amount
    
    
    
    
    
    
    Average
    
    
    AmountAverage
    
    
    Yield or
    
    
    Paid or
    
    
    Average
    
    
    Yield or
    
    
    Paid orAmount
    
    
    Rate
    
    
    Earned
    
    
    Amount
    
    
    Rate
    
    
    Earned(Dollars in thousands)Interest-earning assets:Loans
    
    $
    933,036
    
    
    
    5.74
    %
    
    $
    40,471
    
    
    $
    989,637
    
    
    
    5.65
    %
    
    $
    42,228Investment securitiesTaxable
    
    
    382,836
    
    
    
    3.77
    %
    
    
    10,816
    
    
    
    270,247
    
    
    
    5.08
    %
    
    
    10,301Tax-exempt
    
    
    22,828
    
    
    
    4.24
    %
    
    
    727
    
    
    
    20,476
    
    
    
    4.32
    %
    
    
    663Federal funds sold
    
    
    6,481
    
    
    
    0.19
    %
    
    
    9
    
    
    
    27,384
    
    
    
    0.12
    %
    
    
    25Interest-bearing deposits in other banks
    
    
    75,644
    
    
    
    0.52
    %
    
    
    294
    
    
    
    34,921
    
    
    
    0.49
    %
    
    
    127Total interest-earning assets
    
    $
    1,420,825
    
    
    
    4.88
    %
    
    $
    52,317
    
    
    $
    1,342,665
    
    
    
    5.27
    %
    
    $
    53,344Interest-bearing liabilities:Deposits
    
    $
    1,222,743
    
    
    
    1.74
    %
    
    $
    15,873
    
    
    $
    1,076,330
    
    
    
    2.29
    %
    
    $
    18,469Federal funds purchased / securities
sold under repurchase agreements
    
    
    1,647
    
    
    
    1.46
    %
    
    
    18
    
    
    
    53,933
    
    
    
    0.79
    %
    
    
    320Other borrowings
    
    
    97,223
    
    
    
    3.79
    %
    
    
    2,757
    
    
    
    104,144
    
    
    
    3.75
    %
    
    
    2,928Total interest-bearing liabilities
    
    $
    1,321,613
    
    
    
    1.89
    %
    
    $
    18,648
    
    
    $
    1,234,407
    
    
    
    2.35
    %
    
    $
    21,717Net interest margin/income:
    
    
    
    
    
    
    3.13
    %
    
    $
    33,669
    
    
    
    
    
    
    
    3.11
    %
    
    $
    31,627
 Three Months Ended 2010 compared to Three Months Ended 2009:
    39




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##### Table of Contents



Nine Months Ended 2010 compared to Nine Months Ended 2009:
     40




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##### Table of Contents



Table 5  Rate/Volume Analysis
 Three Months EndedSeptember 30, 2010 compared to September 30, 2009Increase (Decrease) due toVolume
    
    
    Rate
    
    
    Combined
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    
    (868
    )
    
    
    278
    
    
    
    (17
    )
    
    
    (607
    )Investment securitiesTaxable
    
    
    2,227
    
    
    
    (789
    )
    
    
    (575
    )
    
    
    863Tax-exempt
    
    
    21
    
    
    
    (8
    )
    
    
    (1
    )
    
    
    12Federal funds sold
    
    
    (1
    )
    
    
    (1
    )
    
    
    0
    
    
    
    (2
    )Interest-bearing deposits in other banks
    
    
    18
    
    
    
    6
    
    
    
    2
    
    
    
    26Total interest-earning assets
    
    
    1,397
    
    
    
    (514
    )
    
    
    (591
    )
    
    
    292Interest-bearing liabilities:Deposits
    
    
    1,035
    
    
    
    (1,273
    )
    
    
    (233
    )
    
    
    (471
    )Federal funds purchased / securities
sold under repurchase agreements
    
    
    (113
    )
    
    
    109
    
    
    
    (108
    )
    
    
    (112
    )Other borrowings
    
    
    (60
    )
    
    
    (39
    )
    
    
    2
    
    
    
    (97
    )Total interest-bearing liabilities
    
    
    862
    
    
    
    (1,203
    )
    
    
    (339
    )
    
    
    (680
    )Net change in net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    972
 Table 6  Rate/Volume Analysis
 Nine Months EndedSeptember 30, 2010 compared to September 30, 2009Increase (Decrease) due toVolume
    
    
    Rate
    
    
    Combined
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    
    (2,415
    )
    
    
    698
    
    
    
    (40
    )
    
    
    (1,757
    )Investment securitiesTaxable
    
    
    4,292
    
    
    
    (2,666
    )
    
    
    (1,111
    )
    
    
    515Tax-exempt
    
    
    76
    
    
    
    (11
    )
    
    
    (1
    )
    
    
    64Federal funds sold
    
    
    (19
    )
    
    
    13
    
    
    
    (10
    )
    
    
    (16
    )Interest-bearing deposits in other banks
    
    
    148
    
    
    
    9
    
    
    
    10
    
    
    
    167Total interest-earning assets
    
    
    2,082
    
    
    
    (1,957
    )
    
    
    (1,152
    )
    
    
    (1,027
    )Interest-bearing liabilities:Deposits
    
    
    2,512
    
    
    
    (4,496
    )
    
    
    (612
    )
    
    
    (2,596
    )Federal funds purchased / securities
sold under repurchase agreements
    
    
    (310
    )
    
    
    269
    
    
    
    (261
    )
    
    
    (302
    )Other borrowings
    
    
    (194
    )
    
    
    25
    
    
    
    (2
    )
    
    
    (171
    )Total interest-bearing liabilities
    
    
    2,008
    
    
    
    (4,202
    )
    
    
    (875
    )
    
    
    (3,069
    )Net change in net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,042
  41




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##### Table of Contents



Provision for Loan Losses
  Noninterest Income
 Table 7  Noninterest Income
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    Variance
    
    
    September 30,
    
    
    Variance2010
    
    
    2009
    
    
    Amount
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Amount
    
    
    %(Dollars in thousands)
    
    
    (Dollars in thousands)Service charges and fees on deposits
    
    $
    1,802
    
    
    $
    1,846
    
    
    $
    (44
    )
    
    
    (2.4
    %)
    
    $
    5,145
    
    
    $
    5,224
    
    
    $
    (79
    )
    
    
    (1.5
    %)Gain on sales of loans
    
    
    2,877
    
    
    
    1,945
    
    
    
    932
    
    
    
    47.9
    %
    
    
    6,453
    
    
    
    6,643
    
    
    
    (190
    )
    
    
    (2.9
    %)Gain (loss) on sale of fixed assets
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    N/A
    
    
    
    26
    
    
    
    (16
    )
    
    
    42
    
    
    
    (262.5
    %)Investment securities gains (losses), net
of other-than-temporary impairment
    
    
    679
    
    
    
    25
    
    
    
    654
    
    
    
    2616.0
    %
    
    
    841
    
    
    
    718
    
    
    
    123
    
    
    
    17.1
    %Retail investment income
    
    
    497
    
    
    
    326
    
    
    
    171
    
    
    
    52.5
    %
    
    
    1,248
    
    
    
    854
    
    
    
    394
    
    
    
    46.1
    %Trust services fees
    
    
    276
    
    
    
    268
    
    
    
    8
    
    
    
    3.0
    %
    
    
    853
    
    
    
    766
    
    
    
    87
    
    
    
    11.4
    %Increase in cash surrender value of
bank-owned life insurance
    
    
    257
    
    
    
    256
    
    
    
    1
    
    
    
    0.4
    %
    
    
    709
    
    
    
    649
    
    
    
    60
    
    
    
    9.2
    %Miscellaneous income
    
    
    149
    
    
    
    142
    
    
    
    7
    
    
    
    4.9
    %
    
    
    466
    
    
    
    428
    
    
    
    38
    
    
    
    8.9
    %Total noninterest income
    
    $
    6,536
    
    
    $
    4,808
    
    
    $
    1,728
    
    
    
    35.9
    %
    
    $
    15,741
    
    
    $
    15,266
    
    
    $
    475
    
    
    
    3.1
    %
 Three Months Ended 2010 compared to Three Months Ended 2009:
   42




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##### Table of Contents



Nine Months Ended 2010 compared to Nine Months Ended 2009:
  Noninterest Expense
 Table 8  Noninterest Expense
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    Variance
    
    
    September 30,
    
    
    Variance2010
    
    
    2009
    
    
    Amount
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Amount
    
    
    %(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and other
personnel expense
    
    $
    6,115
    
    
    $
    5,469
    
    
    $
    646
    
    
    
    11.8
    %
    
    $
    17,524
    
    
    $
    16,927
    
    
    $
    597
    
    
    
    3.5
    %Occupancy expenses
    
    
    1,132
    
    
    
    1,213
    
    
    
    (81
    )
    
    
    (6.7
    %)
    
    
    3,469
    
    
    
    3,495
    
    
    
    (26
    )
    
    
    (0.7
    %)Marketing & business development
    
    
    315
    
    
    
    395
    
    
    
    (80
    )
    
    
    (20.3
    %)
    
    
    903
    
    
    
    1,124
    
    
    
    (221
    )
    
    
    (19.7
    %)Processing expense
    
    
    392
    
    
    
    440
    
    
    
    (48
    )
    
    
    (10.9
    %)
    
    
    1,150
    
    
    
    1,402
    
    
    
    (252
    )
    
    
    (18.0
    %)Legal and professional fees
    
    
    468
    
    
    
    379
    
    
    
    89
    
    
    
    23.5
    %
    
    
    1,302
    
    
    
    1,142
    
    
    
    160
    
    
    
    14.0
    %Data processing expense
    
    
    347
    
    
    
    326
    
    
    
    21
    
    
    
    6.4
    %
    
    
    1,037
    
    
    
    938
    
    
    
    99
    
    
    
    10.6
    %FDIC insurance
    
    
    538
    
    
    
    568
    
    
    
    (30
    )
    
    
    (5.3
    %)
    
    
    1,631
    
    
    
    2,227
    
    
    
    (596
    )
    
    
    (26.8
    %)(Gain) loss on sale of other real estate
    
    
    25
    
    
    
    225
    
    
    
    (200
    )
    
    
    (88.9
    %)
    
    
    (344
    )
    
    
    516
    
    
    
    (860
    )
    
    
    (166.7
    %)Other real estate valuation allowance
    
    
    683
    
    
    
    
    
    
    
    683
    
    
    
    N/A
    
    
    
    1,380
    
    
    
    
    
    
    
    1,380
    
    
    
    N/AOther operating expenses
    
    
    968
    
    
    
    1,249
    
    
    
    (281
    )
    
    
    (22.5
    %)
    
    
    2,925
    
    
    
    3,135
    
    
    
    (210
    )
    
    
    (6.7
    %)Total noninterest expense
    
    $
    10,983
    
    
    $
    10,264
    
    
    $
    719
    
    
    
    7.0
    %
    
    $
    30,977
    
    
    $
    30,906
    
    
    $
    71
    
    
    
    0.2
    %
 Three Months Ended 2010 compared to Three Months Ended 2009:
     43




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##### Table of Contents



Nine Months Ended 2010 compared to Nine Months Ended 2009:
     Income Taxes
    44




---



##### Table of Contents



Loans
  Table 9  Loan Portfolio Composition
 September 30, 2010
    
    
    December 31, 2009Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial financial and
agricultural
    
    $
    97,123
    
    
    
    10.93
    %
    
    $
    102,160
    
    
    
    10.90
    %Real estateCommercial
    
    
    343,082
    
    
    
    38.61
    %
    
    
    322,864
    
    
    
    34.44
    %Residential
    
    
    244,215
    
    
    
    27.48
    %
    
    
    219,217
    
    
    
    23.38
    %Acquisition, development
and construction
    
    
    185,934
    
    
    
    20.93
    %
    
    
    270,062
    
    
    
    28.81
    %Total real estate
    
    
    773,231
    
    
    
    87.02
    %
    
    
    812,143
    
    
    
    86.63
    %ConsumerDirect
    
    
    16,269
    
    
    
    1.83
    %
    
    
    20,507
    
    
    
    2.19
    %Indirect
    
    
    1,048
    
    
    
    0.12
    %
    
    
    1,898
    
    
    
    0.20
    %Revolving
    
    
    931
    
    
    
    0.10
    %
    
    
    836
    
    
    
    0.09
    %Total consumer
    
    
    18,248
    
    
    
    2.05
    %
    
    
    23,241
    
    
    
    2.48
    %Deferred loan origination costs (fees)
    
    
    (6
    )
    
    
    (0.00
    %)
    
    
    (55
    )
    
    
    (0.01
    %)Total
    
    $
    888,596
    
    
    
    100.00
    %
    
    $
    937,489
    
    
    
    100.00
    %
    45




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##### Table of Contents



September 30, 2010ReservesBalance
    
    
    Original
    
    
    Advanced
    
    
    Remaining(Dollars in thousands)Loan 1
    
    $
    4,188
    
    
    
    179
    
    
    
    179
    
    
    
    Loan 2
    
    
    10,197
    
    
    
    300
    
    
    
    300
    
    
    
    Loan 3
    
    
    2,294
    
    
    
    255
    
    
    
    255
    
    
    
    Loan 4
    
    
    453
    
    
    
    30
    
    
    
    30
    
    
    
    Loan 5
    
    
    163
    
    
    
    10
    
    
    
    10
    
    
    
    Loan 6
    
    
    1,112
    
    
    
    81
    
    
    
    81
    
    
    
    
 December 31, 2009ReservesBalance
    
    
    Original
    
    
    Advanced
    
    
    Remaining(Dollars in thousands)Loan 1
    
    $
    4,278
    
    
    
    179
    
    
    
    179
    
    
    
    Loan 2
    
    
    9,666
    
    
    
    300
    
    
    
    77
    
    
    
    223Loan 3
    
    
    2,598
    
    
    
    255
    
    
    
    255
    
    
    
    Loan 4
    
    
    455
    
    
    
    30
    
    
    
    30
    
    
    
    Loan 5
    
    
    166
    
    
    
    10
    
    
    
    10
    
    
    
    Loan 6
    
    
    1,133
    
    
    
    81
    
    
    
    81
    
    
    
    
  46




---



##### Table of Contents



Loan Review and Classification Process
     47




---



##### Table of Contents



Nonperforming Assets
     48




---



##### Table of Contents



Table 10  Non-Performing Assets
 September 30, 2010
    
    
    December 31, 2009
    
    
    September 30, 2009(Dollars in thousands)Nonaccrual loans:Commercial financial and agricultural
    
    $
    746
    
    
    $
    616
    
    
    $
    602Real Estate:Commercial
    
    
    4,754
    
    
    
    2,932
    
    
    
    2,299Residential
    
    
    4,623
    
    
    
    4,623
    
    
    
    4,383Acquisition, development and construction
    
    
    13,999
    
    
    
    23,755
    
    
    
    31,299Consumer
    
    
    411
    
    
    
    331
    
    
    
    397Total Nonaccrual loans
    
    
    24,533
    
    
    
    32,257
    
    
    
    38,980Restructured loans (1)
    
    
    918
    
    
    
    
    
    
    
    1,980Other real estate owned
    
    
    7,106
    
    
    
    7,974
    
    
    
    15,619Total Non-performing assets
    
    $
    32,557
    
    
    $
    40,231
    
    
    $
    56,579Loans past due 90 days or more
and still accruing interest
    
    $
    
    
    
    $
    
    
    
    $
    3,168Non-performing assets to total assets
    
    
    1.98
    %
    
    
    2.70
    %
    
    
    3.83
    %Non-performing assets to total loans and OREO
    
    
    3.63
    %
    
    
    4.26
    %
    
    
    5.78
    %Allowance for loan loss to total nonaccrual loans
    
    
    104.10
    %
    
    
    69.25
    %
    
    
    43.17
    %
 (1)
    
    Restructured loans on nonaccrual status at period end are included under nonaccrual loans in
the table.   49




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##### Table of Contents



Table 11  Other Real Estate Owned
 2010
    
    
    2009(Dollars in thousands)Beginning balance, January 1
    
    $
    7,974
    
    
    
    5,734Additions
    
    
    7,911
    
    
    
    16,831Increase in valuation allowance
    
    
    (1,380
    )
    
    
    Sales
    
    
    (7,760
    )
    
    
    (6,430
    )Gain (loss) on sale of OREO
    
    
    344
    
    
    
    (516
    )Deferred gain on sale of OREO
    
    
    17
    
    
    
    Ending balance, September 30
    
    $
    7,106
    
    
    
    15,619
  2010
    
    
    2009(Dollars in thousands)Other Real Estate:Single family developed lots
    
    $
    1,819
    
    
    $
    3,348Single family undeveloped land
    
    
    
    
    
    
    1,0501-4 Family residential
    
    
    1,286
    
    
    
    2,761Commercial real estate
    
    
    2,825
    
    
    
    3,274Condominums
    
    
    2,827
    
    
    
    5,1868,757
    
    
    
    15,619Valuation allowance
    
    
    (1,651
    )
    
    
    $
    7,106
    
    
    $
    15,619
   50




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##### Table of Contents



Nonaccrual
    
    
    
    
    
    
    
    
    
    
    
    Appraisal
    
    
    AppraisedBalance
    
    
    Originated
    
    Date
    
    Trigger
    
    Collateral
    
    
    Allowance
    
    Method
    
    Date
    
    
    Value(Dollars in thousands)Commercial Real Estate
    
    $
    1,268
    
    
    04/08/08
    
    03/30/10
    
    delinquency
    
    equipment, land & stock
    
    
    
    
    collateral value
    
    
    05/10
    
    
    
    1,277ADC Loan  Savannah, Georgia
    
    
    1,523
    
    
    09/30/08
    
    05/06/10
    
    delinquency
    
    lots
    
    
    
    
    collateral value
    
    
    06/10
    
    
    
    1,650ADC Loan  CSRA
    
    
    1,789
    
    
    12/05-08/10
    
    11/09-8/10
    
    delinquency
    
    lots & land
    
    
    
    
    collateral value
    
    
    03/10-08/10
    
    
    
    2,5091-4 Family Residential
    
    
    1,162
    
    
    10/07-09/08
    
    11/09-9/10
    
    delinquency
    
    houses & lots
    
    
    
    
    collateral value
    
    
    03/10
    
    
    
    2,523Commercial Real Estate
    
    
    436
    
    
    12/06-04/07
    
    06/21/10
    
    financial condition
    
    land
    
    
    
    
    collateral value
    
    
    09/10
    
    
    
    6051-4 Family Residential
    
    
    805
    
    
    04/19/07
    
    06/21/10
    
    financial condition
    
    home
    
    
    
    
    collateral value
    
    
    08/10
    
    
    
    895ADC Loan  CSRA
    
    
    3,157
    
    
    8/06-11/07
    
    08/17/09
    
    delinquency
    
    lots & land
    
    
    
    
    collateral value
    
    
    09/09-09/10
    
    
    
    5,586ADC Loan  CSRA
    
    
    1,779
    
    
    01/07-03/10
    
    1/10-3/10
    
    delinquency
    
    homes, lots & land
    
    
    
    
    collateral value
    
    
    03/10
    
    
    
    2,002ADC Loan  Athens, Georgia
    
    
    2,213
    
    
    08/06-01/07
    
    01/28/09
    
    delinquency
    
    land & townhomes
    
    
    
    
    collateral value
    
    
    02/09-09/10
    
    
    
    2,415$
    14,132Other, net
    
    
    10,401Nonaccrual loans at September 30, 2010
    
    $
    24,533
 Allowance for Loan Losses
      51




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Table 12  Acquisition Development and Construction Loans
 September 30,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)CSRA  primary market areaPeriod-end loans
    
    
    150,547
    
    
    
    195,394Impaired loans
    
    
    7,540
    
    
    
    11,278Classified/watch rated loans
    
    
    28,896
    
    
    
    27,237Charge-offs % (annualized)
    
    
    1.92
    %
    
    
    0.44
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    10.29
    %General reserve allowance / Loans not impaired %
    
    
    3.64
    %
    
    
    2.10
    %Allowance / Charge-offs
    
    
    1.57
    
    
    
    6.94Savannah, GeorgiaPeriod-end loans
    
    
    11,478
    
    
    
    19,666Impaired loans
    
    
    2,191
    
    
    
    1,300Classified/watch rated loans
    
    
    252
    
    
    
    4,064Charge-offs % (annualized)
    
    
    12.33
    %
    
    
    11.21
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    8.62
    %General reserve allowance / Loans not impaired %
    
    
    3.03
    %
    
    
    3.42
    %Allowance / Charge-offs
    
    
    0.15
    
    
    
    0.34Athens, GeorgiaPeriod-end loans
    
    
    12,948
    
    
    
    20,031Impaired loans
    
    
    3,116
    
    
    
    8,457Classified/watch rated loans
    
    
    3,101
    
    
    
    2,742Charge-offs % (annualized)
    
    
    0.69
    %
    
    
    47.59
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    0.00
    %General reserve allowance / Loans not impaired %
    
    
    12.16
    %
    
    
    10.68
    %Allowance / Charge-offs
    
    
    10.55
    
    
    
    0.13ADC Participations  GeorgiaPeriod-end loans
    
    
    6,500
    
    
    
    9,893Impaired loans
    
    
    
    
    
    
    3,393Classified/watch rated loans
    
    
    6,500
    
    
    
    6,500Charge-offs % (annualized)
    
    
    23.82
    %
    
    
    47.41
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    20.81
    %General reserve allowance / Loans not impaired %
    
    
    15.75
    %
    
    
    9.50
    %Allowance / Charge-offs
    
    
    0.52
    
    
    
    0.28ADC Loans  GreenvillePeriod-end loans
    
    
    1,054
    
    
    
    20,584Impaired loans
    
    
    
    
    
    
    Classified/watch rated loans
    
    
    337
    
    
    
    2,351Charge-offs % (annualized)
    
    
    14.26
    %
    
    
    0.00
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    0.00
    %General reserve allowance / Loans not impaired %
    
    
    16.79
    %
    
    
    1.18
    %Allowance / Charge-offs
    
    
    0.11
    
    
    
    ADC Participations  FloridaPeriod-end loans
    
    
    3,580
    
    
    
    4,034Impaired loans
    
    
    600
    
    
    
    1,034Classified/watch rated loans
    
    
    
    
    
    
    Charge-offs % (annualized)
    
    
    6.83
    %
    
    
    10.26
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    0.00
    %General reserve allowance / Loans not impaired %
    
    
    10.00
    %
    
    
    10.00
    %Allowance / Charge-offs
    
    
    1.15
    
    
    
    0.72
  52




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Table 13  Allowance for Loan Losses
 September 30,2010
    
    
    2009(Dollars in thousands)Total loans outstanding at end of period,
net of unearned income
    
    $
    888,596
    
    
    $
    963,016Average loans outstanding, net of
unearned income
    
    $
    904,808
    
    
    $
    967,764Balance of allowance for loan losses at
beginning of year
    
    $
    22,338
    
    
    $
    14,742Charge-offs:Commercial, financial and agricultural
    
    
    477
    
    
    
    640Real estate  commercial
    
    
    538
    
    
    
    573Real estate  acquisition, development
and construction
    
    
    7,375
    
    
    
    10,299Real estate  residential mortgage
    
    
    869
    
    
    
    1,301Consumer
    
    
    394
    
    
    
    500Total charge-offs
    
    
    9,653
    
    
    
    13,313Recoveries of previous loan losses:Commercial, financial and agricultural
    
    
    159
    
    
    
    317Real estate  commercial
    
    
    10
    
    
    
    15Real estate  acquisition, development
and construction
    
    
    543
    
    
    
    2Real estate  residential mortgage
    
    
    51
    
    
    
    168Consumer
    
    
    251
    
    
    
    154Total recoveries
    
    
    1,014
    
    
    
    656Net loan losses
    
    
    8,639
    
    
    
    12,657Provision for loan losses
    
    
    11,841
    
    
    
    14,741Balance of allowance for loan losses at
end of period
    
    $
    25,540
    
    
    $
    16,826Allowance for loan losses to period end
loans
    
    
    2.87
    %
    
    
    1.75
    %Annualized net charge-offs to average loans
    
    
    1.28
    %
    
    
    1.75
    %
  53




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Liquidity and Capital Resources
    54




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##### Table of Contents



Table 14  Regulatory Capital Requirements
September 30, 2010
 Required for capitalActual

    
    
    adequacy purposes
    
    
    ExcessAmount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Southeastern Bank Financial
CorporationRisk-based capital:Tier 1 capital
    
    $
    119,839
    
    
    
    11.65
    %
    
    
    41,159
    
    
    
    4.00
    %
    
    
    78,680
    
    
    
    7.65
    %Total capital
    
    
    134,626
    
    
    
    13.08
    %
    
    
    82,318
    
    
    
    8.00
    %
    
    
    52,308
    
    
    
    5.08
    %Tier 1 leverage ratio
    
    
    119,839
    
    
    
    7.44
    %
    
    
    64,437
    
    
    
    4.00
    %
    
    
    55,402
    
    
    
    3.44
    %Georgia Bank & Trust CompanyRisk-based capital:Tier 1 capital
    
    $
    104,775
    
    
    
    11.54
    %
    
    
    36,332
    
    
    
    4.00
    %
    
    
    68,443
    
    
    
    7.54
    %Total capital
    
    
    116,278
    
    
    
    12.80
    %
    
    
    72,664
    
    
    
    8.00
    %
    
    
    43,614
    
    
    
    4.80
    %Tier 1 leverage ratio
    
    
    104,775
    
    
    
    7.26
    %
    
    
    64,949
    
    
    
    4.50
    %
    
    
    39,826
    
    
    
    2.76
    %Southern Bank & TrustRisk-based capital:Tier 1 capital
    
    $
    14,532
    
    
    
    11.89
    %
    
    
    4,889
    
    
    
    4.00
    %
    
    
    9,643
    
    
    
    7.89
    %Total capital
    
    
    16,067
    
    
    
    13.15
    %
    
    
    9,778
    
    
    
    8.00
    %
    
    
    6,289
    
    
    
    5.15
    %Tier 1 leverage ratio
    
    
    14,532
    
    
    
    8.03
    %
    
    
    7,243
    
    
    
    4.00
    %
    
    
    7,289
    
    
    
    4.03
    %
   Commitments and Contractual Obligations
   55




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Table 15  Commitments and Contractual Obligations
 Less than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than1 Year
    
    
    Years
    
    
    Years
    
    
    5 Years(Dollars in thousands)Lines of credit
    
    $
    143,088
    
    
    
    
    
    
    
    
    
    
    
    Lease agreements
    
    
    314
    
    
    
    287
    
    
    
    89
    
    
    
    35Deposits
    
    
    1,247,579
    
    
    
    164,757
    
    
    
    21,250
    
    
    
    1,767Securities sold under
repurchase agreements
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    FHLB advances
    
    
    9,000
    
    
    
    19,000
    
    
    
    
    
    
    
    39,000Other borrowings
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    2,947
    
    
    
    20,000Total commitments and
contractual obligations
    
    $
    1,401,119
    
    
    $
    184,044
    
    
    $
    24,286
    
    
    $
    60,802
   56




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##### Table of Contents



Effects of Inflation and Changing Prices
  Regulatory Reform Legislation
  
 
 
 
 
 
 
  57




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##### Table of Contents




 
 
 
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   58




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##### Table of Contents



Part II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. [Removed and Reserved]
 
 Item 5. Other Information
   59




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##### Table of Contents



Item 6. Exhibits
 31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
  60




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATIONDate: October 29, 2010
    By:
    /s/ Darrell R. RainsDarrell R. RainsGroup Vice President, Chief
Financial Officer (Duly Authorized
Officer of Registrant and Principal
Financial Officer)  61